Why Corporations Exist

Corporations are not historical accidents

• They emerged to solve real coordination problems
• They are institutional responses to economic constraints
• They deal with how to organize complex production when markets alone become too expensive to use

In 1937, Ronald Coase asked a deceptively simple question:

If markets are efficient, why do firms exist at all?

His answer reshaped economics: using the market is costly.

Nearly ninety years later, that insight still explains the modern corporation.

But in 2026, coordination costs are shifting again.

And when coordination costs shift, institutional boundaries move.

The Original Problem: Coordination

Imagine a world of pure markets.

Every time you need something done — design, accounting, logistics — you:

• Search for a provider
• Negotiate a contract
• Agree price and scope
• Monitor quality
• Enforce compliance

That works for simple exchanges.

It fails for complex, interdependent production.

The more moving parts involved, the more expensive market coordination becomes.

Coase’s insight was simple:

When the cost of organizing transactions internally is lower than organizing them through the market, firms emerge.

A firm internalizes transactions.

Instead of negotiating every task externally, it substitutes:

• Employment contracts
• Hierarchy
• Managerial authority

Hierarchy is cheaper than constant negotiation.

Corporations: A Further Innovation

The corporation is not just a firm.

It solves additional problems:

1. Limited Liability — Investors risk only their capital, not their personal assets.
2. Capital Aggregation — Large projects require pooled investment.
3. Continuity — The organization survives founders and employees.
4. Legal Personhood — It can contract, sue, borrow, and own property.

Without the corporate form, railways, utilities, pharmaceuticals, semiconductor fabs — and modern platforms — would be extraordinarily difficult to finance.

The corporation is a capital-scaling technology.

The Boundary of the Firm

Oliver Williamson later extended Coase’s work by introducing the concept of asset specificity.

Some investments are highly specialized:

• Custom tooling
• Industry-specific expertise
• Deep process integration

When assets are specific and contracts incomplete, firms expand to internalize risk.

The boundary of the firm is not fixed.

It shifts depending on:

• Transaction costs
• Monitoring costs
• Contract enforceability
• Technological infrastructure

This boundary is dynamic.

A Simple Coordination Model

We can model institutional choice as a function of coordination cost:

When market coordination is expensive → hierarchy dominates. When coordination becomes cheaper → markets expand. When digital infrastructure reduces search, trust, and enforcement costs → networked models become viable.

This does not eliminate corporations.

It changes their boundaries.

2026: A Coordination Shift

Several forces are lowering certain transaction costs:

• Global digital payments
• Remote collaboration tools
• Cloud infrastructure
• Legal standardization
• AI-assisted contract drafting
• Algorithmic matching

Search costs fall. Negotiation costs fall. Monitoring costs fall.

But capital requirements in some sectors are rising.

This produces a tension:

• Labor coordination may fragment.
• Capital concentration may intensify.

The result is not the death of the corporation — but potential structural adaptation.

Platforms as Modern Corporations?

It is tempting to say corporations are disappearing.

They are not.

Platforms are corporations.

They have:

• Shareholders
• Limited liability
• Governance
• Balance sheets

What differs is not the legal form — but the coordination architecture.

Traditional corporation:

• Internal hierarchy
• Employment-based production

Platform corporation:

• Externalized contributors
• API-mediated coordination
• Market mechanisms embedded inside a corporate shell

The question is not whether corporations survive.

The question is:

Where does coordination occur — inside the firm, or across networks attached to it?

Institutions Track Coordination Costs

Throughout history:

• Guilds dominated when craft knowledge was localized.
• Industrial corporations rose when scale required capital aggregation.
• Managerial hierarchies expanded when monitoring was expensive.

Institutions are not ideological accidents. They are coordination responses.

Institutional metrics, like corporate KPIs or productivity measures, are themselves projections of what an organization chooses to optimize.

As explored in Metrics Are Projection, measurement systems do not merely observe reality — they shape it.

When coordination technology changes, institutional form eventually follows.

We may be entering such a phase again.

Not collapse. Not revolution. Adaptation.

Open Questions

If coordination costs continue to fall:

• Do firms become smaller?
• Do professional guild-like networks re-emerge?
• Does employment fragment into portfolio work?
• Do corporations increasingly act as capital hubs rather than labor containers?

We do not yet know the equilibrium.

But we can observe the forces.

This post begins a broader exploration of how institutional forms evolve when coordination technologies shift.

The corporation solved a real problem.

The question is not whether it was necessary.

The question is what problem we are solving next.

References & Intellectual Lineage

• Coase, R. H. (1937). The Nature of the Firm. Economica.
• Williamson, O. E. (1985). The Economic Institutions of Capitalism. Free Press.
• Berle, A. A., & Means, G. C. (1932). The Modern Corporation and Private Property. Macmillan.

These works formalized the idea that firms exist to minimize transaction costs and manage incomplete contracts — a lens that remains surprisingly powerful in the digital era.